Ex-hedge fund employees charged in insider probe

By Ben Rooney, staff reporterFebruary 8, 2011: 1:58 PM ET

NEW YORK (CNNMoney) -- Federal authorities announced charges Tuesday against four former hedge fund employees, part of an ongoing probe focused on consulting firms that allegedly leaked inside information about tech companies.

"The complaint unsealed today is a sad chronicle not only of criminal conduct but also its brazen cover-up," said Preet Bharara, the U.S. Attorney for the Southern District of New York, who was joined by FBI and SEC officials in the announcement. "It alleges hard core insider trading in stock after stock -- people blatantly trafficking in material, non-public information."

Prosecutors said the defendants, representing six different hedge funds, obtained inside information on quarterly earnings reports from big technology companies from an expert-network consultant between 2006 and 2010.

Samir Barai, the founder and portfolio manager of Barai Capital Management in New York, and Donald Longueuil, a former managing director at a Connecticut-based hedge fund, have been charged with conspiracy to commit securities fraud and obstruction of justice.

Prosecutors said Barai and Longueuil allegedly attempted to destroy digital records of their activites after reading articles about the federal investigation into insider trading and so-called "expert networking" firms.

Barai, 39, surrendered to authorities and Longueuil, 34, was arrested at his home in New York earlier Tuesday.

Jason Pflaum, who worked as a research analyst for Barai, and Noah Freeman, a former managing director at a Boston-based hedge fund, were also charged with securities fraud.

Pflaum, 37, and Freeman, 35, pleaded guilty and are cooperating with investigators.

Attorneys representing the accused did not immediately respond to phone calls requesting comment.

According to the complaint, Longueuil attempted to cover up evidence of insider trading by destroying an external flash drive containing a "log" of conversations he had with company insiders.

Longueuil later told Freeman, who was cooperating with investigators at the time, that he used a pair of pliers to break up the drives before distributing the parts to "four different garbage trucks" in New York City.

"This may be the first-ever use by a portfolio manager of pliers as a tool of the trade," said Bharara.

The ongoing investigation had previously resulted in the arrest of several employees of Primary Global Research, a California-based expert-networking firm.

The government alleges that Primary Global consultants leaked inside information on big technology companies to unnamed hedge funds over a period of several years. But the charges disclosed Tuesday are the first to involve investors who allegedly profited from the inside information.

Janice Fedarcyk, the FBI assistant director-in-charge, said she expects the investigation to continue "for some time" and to result in "additional arrests."

While prosecutors pledged to continue their investigation, they acknowledged that the services provided by expert-networking firms are not inherently illegal.

Robert Khuzami, director of the SEC's division of enforcement, said Primary Global was a firm that "matched theft with greed." But he added that "This is not a condemnation of expert-networking firms."